An Incentive for Efficiency

States could reward local governments—and their taxpayers—for finding creative ways to provide services for less money.

The script is a predictable one during tough economic times: The federal government cuts back on the money it sends to states (stimulus programs aside), which in turn reduce aid to their local governments. The buck gets passed, but taxpayers inevitably pay.

Ground zero in this scenario is local property taxes, usually the biggest source of city and county revenue. Even in states like California and Massachusetts that have enacted property tax limitations, taxes still go up—thanks to higher property appraisals, tax-rate increases approved by voters who fear cuts in critical services, or other ways of getting around the limits.

There is no magic antidote to the cuts that accompany bad economic times, but one way to improve a bad situation is to create incentives for local governments to cut costs and operate more efficiently. One idea that kicked around a political campaign I worked on never saw the light of day, but, given current fiscal realities, it just might be time to give it another look.

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Every time a municipality saves money by engaging in any one of a number of money-saving activities—such as joining with other communities to do joint purchasing, implementing fast-track permitting, reducing the taxpayer share of public-employee health-insurance premiums or signing a collective-bargaining agreement with raises below the expected rise in municipal revenue—states could provide the municipality with a matching payment equal to half the savings achieved. The caveat is that at least one-quarter of the funds received from this "property tax relief fund" be returned to local taxpayers in the form of a property-tax rebate.

For example, if Town A saves $200,000 by joining with Town B to do bulk purchasing, the state would add to that savings by providing the town with a $100,000 payment from the fund. Of the $100,000 state payment, at least $25,000 would go to provide property tax relief. Communities could realize additional fiscal benefits by implementing other money-saving practices until the state appropriation for the property tax relief fund is exhausted.

Of course, finding the start-up money for a property tax relief fund would be no easy task in the midst of fiscal crisis. But an initial appropriation of $50 million, less than 0.2 percent of annual expenditures in an average-sized state, could spark efficiencies that would more than pay for themselves over time.

Successfully administering such a fund also would require a couple of things government isn't exactly known for. First, elected officials would have to make difficult decisions, the payback for which would not be immediate. And it would also require the discipline to set money aside during good times.

Careful state oversight would also be needed to define exactly what actions merit payment from the fund. Much like in the movie Casablanca, where Captain Renault was "shocked, shocked" to find that gambling was going on at Rick's Café, there would be municipalities that try to collect from the fund by claiming dubious savings.

There's an old saying that if you want to reform government, you'd better be ready to pay for it. In a perfect world, it wouldn't be necessary to pay municipalities to do what they should be doing anyway, but potentially transforming the culture of local governments is something on which taxpayers might just be willing to make a down payment.